Leverage on technology to ease labour cost pressure, new catering centre required to support Changi Airport expansion 
 

Higher capex could put our DPS forecasts at risk, but we see scope to optimise capital structure 
 

Valuation still attractive at 15x FY15E P/E with dividend yield of 5.0-5.6% over the next three years. Maintain BUY. 

Mr Alex Hungate, the new CEO of SATS, held his first meeting with the analyst community yesterday and shared his strategy for the group. His key points are: 1) cement its presence in Asia, 2)  leverage on technology to ease labour cost pressure, 3) take  advantage of Changi Airport’s expansion, and 4) raise capex if needed but there would still be room to gear up the balance sheet. 

We also visited SATS’s Inflight Catering Centre (ICC) 1 and were impressed with the attention to detail, cleanliness and organised operations at the facility. This has enabled us to better appreciate the synergies between SATS and its non-aviation food business, which processes food before final packaging at the airport. 

We remain positive on the stock as ongoing initiatives to drive productivity will better position SATS for the future. With demand for air travel in the region on the rise, the outlook for its aviation business is bright. Incremental contributions from its non-aviation business will also continue to provide stable income and enhance economies of scale for the group. 

 

Although guidance for a higher capex could put our call for higher dividends over the next three years at risk, we reiterate our view that SATS could enhance shareholders’ returns by optimising its capital structure. At 15x FY15E P/E, valuation remains attractive with the stock offering a dividend yield of 5.0-5.6% over the next three years. Maintain BUY with unchanged TP of SGD4.00 (DCF based: WACC= 7.6%, tg= 1.0%)